Wharton Professor on Iraq: When the Oil Flows, So Follow Jobs and Social Progress

Despite sabotage of its pipelines and continual looting, Iraq was to start exporting oil in August at a rate of hundreds of thousands of barrels a day, according to The New York Times. Gazette associate editor Susan Frith talked with Dr. Raphael Amit, the Robert B. Goergen Professor of Entrepreneurial Management at Wharton, about what getting the oil flowing again may mean for Iraq’s economy.

What effect is Iraq’s resumption of oil exportation likely to have on world markets and on the country’s own economy?
I think in many ways world oil prices already reflect the fact that the market expects Iraqi oil to come on-line, so I don’t think there will be a substantial adjustment to prices. But it’s certainly the case, in my view, that the resumption of Iraqi oil exports will provide the financial means to revive the Iraqi economy. It is in many ways like a snowball. Once that happens many other things in Iraq will fall into place. Once people have jobs and once they have the resumption of basic services like health and education and the rebuilding of infrastructure, much of the unrest that you see right now on the streets of Iraq will subside.

But for many, many years, the infrastructure of the oil industry has been neglected. It takes time. It’s a Catch-22. You need money to revive the infrastructure. But without the oil there’s no money.

What about sabotage and looting? What kind of obstacles do they pose?
It is the sabotage and the looting of spare parts that makes it so difficult to resume [exporting oil]. So spare parts have to be bought. Iraq needs money to buy them, but there is no money. The United States is helping very much in facilitating these things, providing bridge loans and the means to do that.

There will always be some minority who will find some ax to grind, but these are the outliers, and of course it is the outliers that we watch on TV every day. I think we have to discount these and say that overall there is a positive movement toward social improvement, freedom and free expression, and [better] economic conditions.

The firms involved in rebuilding Iraq, such as Halliburton, have pushed for oil profits to be pledged to pay for their work. Is there going to be enough money to finance reconstruction, pay down Iraq’s debt, and to build beyond that?
From a business standpoint I can certainly understand that the contractors in Iraq want to have their revenue guaranteed by oil. The work these contractors do in and of itself will propel the economy, because they will hire local labor and engineers and service and support personnel.

Is there a future for the development of other economic sectors in Iraq besides oil?
Over time. It may take a generation. Many years in the past, Iraq had the ability to have a highly educated labor force, and they could use the knowledge to develop new industries. Obviously they have the oil, which gets them started, but they need to diversify, because the oil is finite. I’m confident that whatever government takes over will make the investments that [capitalize on] the labor force and Iraq’s resources. An example is the textile industry [which was prosperous in the past]. But Iraq is unlikely to become a mecca for tourism anytime soon.

How do you think Iraq’s oil industry should be managed in the future? Should it be privatized?
Yes. The technological and operating know-how reside within large multinational companies. The joint-venture model has worked in other Middle Eastern countries, such as Saudi Arabia and Kuwait. Over time one might need to utilize fairly advanced secondary-recovery technology to enable the exportation of the oil—and that is where Iraq may need international involvement. [Secondary recovery involves pumping water or steam under the ground to pressure oil to come up to the surface. Another reason to import technological support] is to build on the crude oil and export oil products, which would generate more money.

Is there any danger of exploitation with a privatized oil industry? 
Yes. Is there an alternative for Iraq? Not really. You have to think about the cost of not doing something.